Cambridge A Level Economics: Income and wealth inequality and redistribution (9708) – Revision Notes

These notes condense section 3.3 (Addressing income and wealth inequality) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 3 is AS Level content, and the syllabus treats it as assumed knowledge for A Level Papers 3 and 4. For full explanations and worked examples, read the study guide. All figures here are invented for illustration.

Useful links: the Cambridge A Level Economics hub, the printable checklist, the practice questions and the free 10-minute diagnostics.

3.3.1 Flow and stock

Term	Meaning	Examples
Income (flow)	Money received per period	Wages, rent, interest, dividends, benefits per month
Wealth (stock)	Value of assets owned minus debts, at one date	Property, savings, shares, pension fund

• Saving moves income into wealth. Wealth earns income (rent, interest, dividends).
• Net wealth = assets − debts. Example: assets 340,000 and debts 190,000 give net wealth of 150,000.
• A household can have high income and low wealth, or low income and high wealth.

3.3.2 Measuring inequality

Quintile shares. Rank households, split into five equal groups and compare shares of income. Example: if the richest 20% get 40% and the poorest 20% get 8%, the ratio is 40 ÷ 8 = 5.0.

Gini coefficient (calculation not required).

Value	Meaning
0	Perfect equality
Between 0 and 1	Higher value = greater inequality
1	One household has all the income or wealth

• It is the area between the line of equality and the cumulative-share curve, as a fraction of the area under the line of equality.
• Check what is measured: income or wealth, before or after tax and benefits, households or individuals.
• A fall in the Gini from 0.46 (before tax and benefits) to 0.39 (after) shows that taxes and benefits narrowed inequality.
• Wealth is usually more unequally held than income because it accumulates.

Limitations. One number hides the shape of the distribution; different distributions can share a Gini. It says nothing about absolute living standards. It can be affected by household size, age structure and hidden activity. It is a snapshot at one date. It does not show whether inequality is fair.

3.3.3 Reasons for inequality

Cause	Link in the chain
Skills and education	Scarce, costly skills have limited supply, so a higher wage clears the market
Demand shifts	A rise in demand for an occupation raises its wage and employment
Compensating differences	Unpleasant or risky work must pay more to attract workers
Discrimination, barriers	Unequal access to education or jobs lowers earnings
Employment status	Unemployment, part-time work, age and life stage
Ownership of capital	Profit, rent, interest and dividends go to owners
Market power	Bargaining power raises rewards
Saving and compounding	Higher earners save more; 50,000 at 6% for 10 years becomes 50,000 × 1.06¹⁰ = 89,542
Inheritance and gifts	Wealth passes between generations
Asset price rises	Owners of property and shares gain most

3.3.4 Policies

Method for a labour market question (minimum wage).

1. Find the free-market wage: set demand equal to supply.
2. Calculate demand and supply at the minimum wage.
3. Employment = demand. Unemployment = supply − demand.
4. Calculate the percentage change in employment and in the wage. Elasticity of labour demand = %ΔL ÷ %Δw.
5. Compare wage bills (wage × employment) before and after.
6. Evaluate.

Worked reminder (invented). Demand L = 700 − 20w and supply L = −100 + 30w. Then 800 = 50w, so w = 16 and L = 380. A minimum wage of 18 gives demand 340 and supply 440, so unemployment is 100. %ΔL = −40 ÷ 380 = −10.5% and %Δw = +12.5%, so elasticity = −0.84 (inelastic). The wage bill rises from 16 × 380 = 6,080 to 18 × 340 = 6,120.

Policy	How it redistributes	Strengths	Weaknesses
Minimum wage	Raises pay at the bottom, before tax	Direct, low cost to government	Job losses if demand is elastic, does not help the unemployed, poor targeting
Transfer payments	Taxpayers to recipients, no good supplied in return	Targets poverty, flexible	Cost, possible work disincentives, take-up and administration problems
Progressive income taxes	Average rate rises with income	Raises revenue, narrows post-tax gap	Disincentives, avoidance, migration
Inheritance and capital taxes	Taxes wealth transferred or gains made	Aims at the wealth stock and unearned gain	Avoidance, low revenue, family firms
State provision	Benefit in kind: health, education	Equal access, builds human capital	Opportunity cost, waste, middle-class capture

Transfers: universal versus means-tested. Universal benefits are simple and reach everyone but cost more and give money to the well off. Means-tested benefits are targeted and cheaper but cost more to administer and may discourage extra earnings.

Progressive tax method.

1. Tax each band separately. Example: 0% up to 9,000 and 30% above. Income 24,000 is taxed on 15,000, so tax = 4,500.
2. Average rate = tax ÷ income = 4,500 ÷ 24,000 = 18.75%. Marginal rate = 30%.
3. Income 60,000: tax = 51,000 × 0.30 = 15,300, average rate 25.5%.
4. The average rate climbs as income climbs, which makes the tax progressive.

Inheritance and capital tax method.

1. Deduct the threshold or allowance.
2. Apply the rate.
3. Effective rate = tax ÷ whole estate.

Example: estate 380,000, threshold 200,000, rate 40%. Tax = 180,000 × 0.40 = 72,000, effective rate 18.9%. Capital gain: asset bought for 50,000, sold for 90,000, allowance 5,000, rate 20%. Tax = (40,000 − 5,000) × 0.20 = 7,000.

State provision method. Express the service’s value as a share of income. Value 4,000 is 25% of a 16,000 income but 5% of an 80,000 income. Final incomes are 20,000 and 84,000, so the ratio falls from 80,000 ÷ 16,000 = 5.0 to 84,000 ÷ 20,000 = 4.2.

Must-know distinctions

• Flow versus stock. Income versus wealth.
• Progressive, proportional and regressive: the average rate rises, stays constant or falls as income rises.
• Marginal rate (next unit) versus average rate (total tax ÷ income).
• Universal versus means-tested benefits.
• Redistribution of income (flow) versus redistribution of wealth (stock).
• Equality (same outcome) versus equity (fairness). Say which you are using.

Evaluation prompts

• Size of effect: how large is the change in the Gini or the wage?
• Elasticity: how responsive are employers, workers and savers?
• Time: do education and health spending pay back only in the long run?
• Cost and funding: what is the opportunity cost of revenue?
• Incentives: is there a disincentive to work, save or invest, and is it large?
• Combination: policies work together, such as taxes funding state provision.
• Judgement: which policy is best for this objective, and why?

Quick self-test

1. Classify as flow or stock: rent received in a month; the value of a share portfolio on 31 December; interest earned in a year.
2. A household owns assets of 340,000 and owes 190,000. State its net wealth.
3. Country P has a Gini of 0.52 and Country Q has 0.38. Which has greater inequality?
4. A tax is 0% up to 9,000 and 30% above. Calculate the tax and average rate on 24,000.
5. In the minimum wage example above, calculate the unemployment created.
6. Calculate the elasticity of labour demand between wages 16 and 18 in that example.
7. An estate of 380,000 has a threshold of 200,000 and a rate of 40%. Calculate the tax.
8. Give two reasons wealth is more unequally distributed than income.
9. Why might a minimum wage fail to reduce household poverty?
10. State two limitations of the Gini coefficient.
11. A service worth 4,000 is provided free. Express it as a percentage of an income of 16,000.

Answers

1. Flow; stock; flow.
2. 340,000 − 190,000 = 150,000.
3. Country P.
4. Taxable amount 24,000 − 9,000 = 15,000; tax = 15,000 × 0.30 = 4,500; average rate = 18.75%.
5. Demand 340, supply 440, so unemployment is 100.
6. −40 ÷ 380 = −10.5%; 2 ÷ 16 = 12.5%; elasticity = −0.84.
7. 180,000 × 0.40 = 72,000.
8. Saving needs spare income, so high earners accumulate; compounding returns; inheritance passes wealth on; asset prices rise.
9. Some low-paid workers live in better-off households; job losses; hours cut; the unemployed gain nothing.
10. Hides the shape of the distribution; ignores absolute living standards; can depend on the measure used.
11. 4,000 ÷ 16,000 = 25%.

Where marks are usually lost

• Describing income and wealth without saying flow and stock.
• Reading a high Gini as more equality.
• Taxing the whole income at the top rate instead of band by band.
• Giving the marginal rate where the average rate was asked for.
• Saying the minimum wage always lowers employment, without referring to elasticity.
• Giving a policy list with no judgement.
• Forgetting that transfers and state provision need funding.
• Mixing up the effect on income inequality with the effect on wealth inequality.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International), section 3.3.